On the teeming streets of Lagos, the Nigerian mega-city of 15 million people, the once omnipresent money-changers are going underground.
They’ve become the latest target of authorities desperate to bolster the naira and crush a black market for foreign currency that’s boomed since the crash in oil prices strangled the inflow of dollars. This month, the central bank capped prices that non-bank dealers can charge their customers for dollars, effectively pegging the black-market rate, with intelligence agents threatening to jail anyone who doesn’t comply.
That’s creating a parallel market within the black market, according to analysts at Lagos-based CSL Stockbrokers Ltd. and Afrinvest West Africa Ltd. One trader in the Lagos suburb of Surulere, who asked not to be identified as he feared arrest, said he would continue trading at the old rate with trusted customers while refusing to sell dollars to others. Anyone he doesn’t know may be a government spy, he said.
“The black market will go further underground,” said Omotola Abimbola, an analyst at Afrinvest. “The fact they went as low as getting security forces on the streets shows a new level of desperation.”
Nigeria’s interbank market sets the official naira exchange rate and is meant to serve businesses, but the foreign-currency shortage has forced many to the licensed bureaux de change and the unofficial, or black, market of informal street traders, which sell dollars at a higher rate.
The central bank has made several attempts to defend the currency after it plunged to a record in 2014. Governor Godwin Emefiele tightened capital controls and restricted banks’ ability to trade foreign-exchange, then tried a currency peg that deterred foreign investment and worsened the shortage of dollars companies need to pay for imports of raw materials and equipment.
As the economy shrank and inflation soared, Emefiele relented, resurrecting the inter-bank currency market in June. The naira slumped 38 percent within two months, prompting central bank intervention that has held it around 315 per dollar since then. The currency was little changed at 315.69 per dollar by 8:56 a.m. in Lagos.
Stock and bond investors are still staying away, pointing to the wide gap between the official exchange rate and the black-market rate of about 470 as evidence that the central bank is still manipulating the currency. Forward prices suggest the naira will depreciate further on the official market, with 12-month contracts trading at 442 against the greenback.
Earlier this month, Nigeria’s intelligence arm, the Department of State Services, notified licensed bureaux de change and black-market street traders to cap their rates at 400 per dollar. As a result, those with hard currency are hoarding it rather than selling at an artificially low rate, according to Haruna Usman, a money-changer in Lagos.
“It’s a struggle even to get someone to sell us $200 whereas before, they’d often sell us $1,000 or $5,000,” the kaftan-clad Usman said from the mosque compound where he trades. “Now, they’re only exchanging when they’re desperate.”
The central bank is in no mood to back down. Emefiele said this week that “the security agencies should sustain their checks on the activities of illegal foreign-exchange operators in order to bring sanity to that segment of the market.”
Nigeria isn’t the first country to clamp down on black-market trading. Egypt also arrested street dealers while pegging its currency’s official value, until a dollar-squeeze forced it to devalue Nov. 3. While Nigeria doesn’t have the stomach to let the naira weaken to a market-related level, the move suggest the authorities are getting desperate, according to Teneo Intelligence.
“What Nigeria’s doing absolutely won’t work,” said Manji Cheto, senior vice president at Teneo Intelligence in London. “This is akin to a person in a room that’s caught fire just slamming every panic button they can find because they don’t know which will open the door.”